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Inequality and Taxes: Makers vs. Takers

Inequality and Taxes: Makers vs. Takers



Millions of Americans have been conned into supporting economic policies that work against their own financial interests. These policies also undermine the nation’s growth potential and the standard of living that we are capable of achieving. These same policies mean that the American dream of a more prosperous future is attainable for fewer and fewer people.


And how are we being conned? It isn’t just with lies and misleading slogans. It isn’t just negative rhetoric full of simplistic truisms that appeal to people’s baser instincts. Those things are part of it, to be sure. But it is also the selective use of misleading facts, combined with some of these truisms, and that is what I want to point out here.


These misleading facts are taken out of context and presented in a way that sounds like they make a valid point. The result is a certain type of invalid argument that sounds valid to those who don’t see the context. This type of argument is familiar to us all:


“It isn’t fair that the rich (or the ‘job creators’) are paying all of the taxes while too many people are freeloading. We need to cut the taxes on the rich and make everybody else pay their fair share.”


“You can’t create anything by taking wealth away from those who earn it and give it to those who don’t earn it.”


“If you raise taxes on the rich (and corporations), it will kill jobs. But if you cut taxes on the rich (and corporations), it will create jobs.”


“Wealth redistribution is unfair because it is taking money from those who earn it and giving it to those who don’t earn it.”


“A flat tax (or a consumption tax) should replace the progressive income tax because it is unfair to tax people more simply because they work harder to earn more.”


“I support policies that favor the rich because only rich people will give me a job.”


“It doesn’t matter how much income inequality we have because inequality is required in order to provide the necessary incentives for economic growth.”


“If you complain about inequality, it means that you are jealous of those who have worked hard in order to earn more, and you are engaging in class warfare.”



Those are examples of the type of argument that I am talking about. You can probably think of similar ones that I didn’t list. The point is that all of these arguments are invalid, even though some facts can be taken out of context and used to support each of these claims. The way to counter such arguments is to take the facts used to support these claims, and put them into proper perspective.


Let’s start with these two facts. In the United States we have the least progressive overall tax system since the 1920s, and at the same time we have the most income inequality since the 1920s. A close look at the events and policies that got us to this point will show that those two facts are related. By now you have probably noticed that the current situation is eerily similar to the situation which led up to the Great Depression.



The graphic above shows the historical record of the top marginal income tax rates for individuals. You should note that the current income tax rate for the top income brackets is NOT high by historical standards – it is very low, in fact. The arguments that recent problems are created by a stifling tax on “the rich” do not hold up to these facts, especially when you note that during the years of strongest economic growth in our history – in fact the years that the United States became the top economic superpower in the world – the income tax rates at the top were much higher than they are now. It should also be noted that the middle class was created and grew during these years of strong economic growth and higher top-end taxes, but the middle class has shrunk during the most recent years, after the top income tax rates have fallen.
Not included in the graphic above is the corporate income tax rate, but the history of the corporate rate is similar to the history of the individual rate. For much of the strong growth period of the 1950s, 1960s, and 1970s, the top corporate income tax rate was between 48% and 52%. Since the 1980s, the top corporate income tax rate has been reduced to the current 35%. Again, the historical record does not support the claim that the current income tax rates on the rich and on corporations are stifling the economy. If you want to see the historical record, including year-by-year tax rates and economic results, I have tables here:


U.S. GDP 1929-2013
U.S. Federal Revenue, Spending, and Deficits 1929-2013
U.S. Annual Unemployment Data 1943-2013
U.S. Miscellaneous Economic Data 1929-2013


Federal income tax is only one of many types of tax in the United States. Overall, most taxes historically have been regressive, offset by a progressive income tax. With the income tax code becoming less and less progressive in recent decades, the overall tax code has become flat by historical standards. Those in the top 1/10th of one percent of taxpayers actually pay a little less than those in the top 10%, so at the very high ranges, the income tax becomes regressive. Overall, taxes are only slightly progressive, with taxpayers at all income levels paying an effective rate of around 20% or so to the federal government.


No tax is fair. Any type of tax that favors one group will be considered unfair to another group. Historically, the economy simply worked better when we addressed this “unfairness” issue by having different types of taxes that affected different groups of people with varying degrees of progressiveness – when we had a more progressive income tax structure to offset the regressive nature of other types of taxes. The historical record shows that with a more progressive income tax structure, the income gains in the economy were shared throughout all income levels, even though those with more tended to gain more. Since the income tax rates have become less progressive, however, ALL of the gains have gone to those at the very top of the income levels. For most people, incomes have stagnated and have even decreased in real terms. As a result, the middle class has shrunk and many more people are earning wages at or below poverty levels. Many more people are not able to earn enough to even pay income taxes. More people are without jobs, or require public assistance to supplement their wages.


All of these problems have corresponded to a decrease in the income tax rates for corporations and individuals at the top. I haven’t even mentioned that the income tax rates are even less progressive when viewed in terms of effective rates instead of marginal rates, due to an increase in legal loopholes available to corporations and rich individuals.


So here is where we are:


The income tax rates have become much less progressive. In terms of tax rates, the rich pay a much smaller percentage than they have in the past. But the result is that those at the top have received all of the income gains, and everybody else has received none of the gains. More people are working for wages that are less than a living wage. More people are in poverty, and more people need public assistance in order to make ends meet. Put all of these things together, and you have context. You have to be careful not to confuse the total tax rate paid by individual taxpayers, the total tax dollars paid, the income tax rate paid, and the income tax dollars paid.

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When a group pays a higher percentage of the total tax DOLLARS, but a much lower percentage in terms of tax RATE, then you know that these people only pay more dollars in their income tax bill because they have more income; no other reason. They are NOT paying more in taxes because of stifling tax rates. They ARE paying more in taxes because policy changes have allowed them to receive more of the income. Those who are not paying “their fair share” and are instead receiving “handouts” from those who have to pay more? They are receiving a smaller portion of total national income than they did under a more progressive tax structure. If they had enough income to be taxed, they would be paying taxes. This is an income inequality issue.




If you fall for the con game, you will simply see into this the fact that the rich are paying more of the total tax bill, and more people are receiving “handouts”. You will see this as a “makers vs. takers” issue, and of course you will side with the “makers” and blame the “takers”. And you would be wrong. You would be failing to see the context. You will fail to see that the situation was created because lower effective tax rates on those at the very top have allowed all of the income growth to stay at the top. You will fail to see that changes in effective tax rates have moved in the opposite direction as changes in total tax dollars, and the changes have lowered the income tax rates for the richest individuals and corporations. The context will tell you what created this situation. The context will also tell you what will fix the situation (hint: do the opposite of what created it). But guess what? Because you have been conned, you will advocate for more of what caused the problem in the first place. You will look at who pays the tax dollars, and advocate for lower rates for these people, even though lower rates for these same people helped to create the problem. You will be doubling down on failed policies. And it will be so easy for you to blame the victims of all of this – even while you are a victim yourself.


What about wealth redistribution? It has already happened. The rhetoric says otherwise, but the fact is that in the United States today, tax policies ALWAYS redistribute wealth from the poor and middle class to the rich – and from the rich to the super-rich. It NEVER happens the other way around. New wealth that used to go to all of us, wealth that in fact created a large middle class, now all goes to the top. Policies in effect since the 1980s have guaranteed this.


“Taking away from the makers and giving to the takers is unfair.” Funny how so many people use that truism to oppose giving even a small portion back to the workers who USED to share in economic growth, but who have had their incomes confiscated by policies which give everything to the rich.



What does this mean for the health of the overall economy?


It means that more and more of the income is going to people who will spend less of it to keep the economy going, supporting domestic businesses, and creating jobs. Income that used to go to people who by necessity would spend most of it supporting domestic businesses and jobs is instead going to people who are taking money out of the real economy in order to “invest” in activities that do not create domestic jobs – activities such as offshore tax havens and financial instruments that are not related to job creation. The lower tax rates on the rich have taken away the incentive to invest in jobs – they don’t need the tax write-off that comes from investing in the actual economy if lower income tax rates give them a break anyway.


When financial investments earn income for investors, but do not create jobs, they create bubbles instead. These bubbles will eventually burst, and guess who pays then?


Oh, and one more “investment” that contributes to the problem: Political donations to support politicians who promise to maintain or expand this system.



A version of this essay is included as a chapter in the book Common Misconceptions of Economic Policy by Jerry Wyant. You can purchase this book in paperback form from Amazon and other online book distributors. The list price is $12.99 (only $9.99 using discount code TA9GTK7E when ordering, depending on the distribution channel). Or if you prefer, you can download a digital version on your device (Kindle, Nook, etc.) for $4.99.

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Author: 
Jerry Wyant
Date: 
2014-08-14
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